Month: August 2015

According to the report, the RBI believes India’s growth outlook is improving gradually and says the real activity indicators are backing its 7.6 percent gross domestic product (GDP) projection.

“Business confidence remains robust, and as the initiatives announced in the Union Budget to boost investment in infrastructure roll out, they should crowd in private investment and revive consumer sentiment, especially as inflation ebbs.

The RBI had, in June, lowered the growth forecast for the current fiscal to 7.6 percent from 7.8 percent projected in April, citing various risks, including poor monsoon and rising crude oil prices.

According to RBI, these are the short-term macroeconomic priorities of the central bank: focus on bringing down inflation ; work with the Government and banks on speeding up the resolution of distressed projects and cleaning up bank balance sheets; ensure banks have the capital to make provisions, support new lending, and thus pass on future possible rate cuts.

Inflation

While the progress of monsoons has allayed initial fears, the uncertainity surrounding it continues to remain a risk. But RBI believes fears of a poor monsoon has been offset by the steep fall in global crude prices.

While the central bank expects the fall in crude to soften inflation, it hopes to see it below 6 percent by January 2016.

Fiscal Deficit

The RBI is confident of logging a fiscal deficit of 3.9 percent GDP by 2015-16, buoyed by robust indirect tax collections.

“Furthermore, plans for disinvestment need to be front-loaded to take advantage of supportive market conditions, and also to forestall cutbacks in capital expenditure to meet deficit targets,” highlights the report.

Current Account Deficit (CAD)

The central bank says the Indian economy is vulnerable to external shocks as merchandise exports have contracted through the first four months of 2015-16. While imports have remained subdued, primarily reflecting softening of crude and gold prices, the RBI expects the FY16 CAD to stand at 1.5 percent of the GDP.

Indian fundamentals are much better than the Chinese fundamentals and the outlook for India over the next few years is even better in terms of growth which could easily surpass that of China in next 2 years.

Prime Minister Narendra Modi wants India to become a $20 trillion economy in the future and much of the emphasis by government is now moving towards pushing growth-focused reforms to revive investment cycle and push GDP growth to 7-8 per cent in the next 24 months.

India is projected to grow at 6.3 per cent in 2015 and 6.5 per cent in 2016, when it is likely to cross China’s projected growth rate of 6.3 per cent, the IMF has said.

FIIs could prefer India over other emerging markets due to moderate valuation, stable government and positive economic outlook. The business friendly policies of the new government would keep the sentiments positive towards India.

As per Mr. Nilesh shah The world is worried that China is slowing down. China is devaluing their currency to get an edge for their exports. They can do a replay of 1997 Asian crisis on a much larger scale.

The reality is that most of the other EM currency has dropped more than Renminbi. Today’s China cannot do a devaluation of the scale with which it got away in Mid 90s.

China slowdown is a big positive for India as it pushes more investor’s to look at an alternate model of balanced growth rather than credit led growth. China’s credit to GDP Ratio is more than two times that of India.

US dollar is appreciating against most EM currencies and is putting pressure on US growth and exports. US Fed will be compelled to keep dollar strength in mind while looking to raise Fed rates. US 10 year yield is indicating the same at below 2% after a long gap. Slower rise in US Fed rates will help India to cut interest rates and attract capital flows.

There is a worry that with oil prices dropping below USD 40 world is moving in to recession or slower growth. Actually India is a large importer of commodity. We import 1.4 billion barrel of oil on a gross basis. Every USD 1 drop in oil price helps us save about USD 800 plus million in import bill. Today with oil dropping below USD 40 our incremental saving will be close to USD 16 billion plus since June 2015 high of oil prices. India is a beneficiary of dropping oil and commodity prices.

The government, unlike in the past has used oil price dividend of more than USD 60 billion to clear fiscal mess.

Currently, India is having good macro fundamentals. Even with increased government spending, the fiscal deficit is under check at below 4%. CAD is under control. Inflation is under control with WPI at negative level for last nine months and CPI at 3.8% is below RBIs target level. Indian interest rates are at a level where they can be cut to support growth. IIP growth is recovering. Benefit of improved government spending is yet to fully percolate to economy.Worlds largest fund epfo to start investment in equity.

Correction in most global markets is driven by local factors. For e.g. Chinese markets are down as they have run up significantly in last 18 months. Russia and Brazil are down due to commodity based nature of their markets. NASDAQ is down as valuation of some of their Tech Cos are showing excesses like 2000 technology boom and bust.

In summary .

Global volatility is here to stay for some time

Drop in commodity price is negative for few EMs like Russia and Brazil but hugely beneficial to a country like India

FII selling is led by oil nation’s sovereign funds, GEM funds and ETFs. It is likely to continue for a while

Domestic participation will determine the extent of drop and speed of recovery in Indian markets

We are more likely to see a U-shape recovery than a V-shape recovery as FY17 corporate earnings recovery will support markets.

Provident Fund participation can also provide additional support.

In the short term it will be futile to predict bottom of the market.

Central Banks around the world will swing into action to support markets sooner than later. Their coordinated action will soothe global volatility.

Price-to-book ratio (P/BV) – A ratio used to compare a stock’s market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter’s book value per share.

In simple terms if a company is having 100 crores in assets with 50 crores in liabilities. The book value of the company would be 50 crores. If there are outstanding shares of 25 crores each share would represent Rs.2 (50/25) of book value. If each share sells on the market at Rs.5, then the P/B ratio would be 2.5(=5/2).

Why P/BV is a better model as compared to P/E when it comes to investment decisions

• Price to book value is less volatile as compared to price to earning ratio.
Price to Book Value is a better indicator of valuation for the aggregate market compared to any indicator based on the current or near term profitability like Price to Earnings. The Earnings are very volatile and sensitive to economic conditions.

• Forward Price to Earnings, commonly used as valuation indicator has drawback of forecasting errors as well as undue emphasis on near-term profitability. Also the street estimates on the earnings normally tend to be more reactive to the market conditions than indicative of the valuations for the company. Price to Book in my opinion is a more stable and intuitive measure of the value which can be used across time horizons.

• Price to earnings gets impacted more by unfair accounting policies or by window dressing of company financials – So to explain, EPS can be twisted, prodded and squeezed into various numbers depending on how you do the books. The result is that we often don’t know whether we are comparing the same figures, or apples to oranges.

• Price to book value is better equipped in gauging intrinsic value of a company as it takes into account firm specific details while price to earnings ratio takes into consideration the reflection of the market’s optimism concerning a firm’s growth prospects.

• Price to book value looks at a longer time frame for indicating valuation of a stock Price to book value takes into account result updates which are released by companies on quarterly or half yearly or yearly basis and hence looks at a time frame which is much more stable as compared to price to earnings ratio.

• Book value is a balance sheet item, thereby more reliable than EPS which can fluctuate depending on seasonality, cyclicality and extraordinary items in a company.

Price to book value model helps the investor to take asset allocation calls based on market valuations.

The Endeavour of the model is to quantitatively give an indication on ideal asset allocation based on valuations. This mechanism ensures that the investors buys when the valuation is cheap, but sells when expensive as compared to the long term mean PBV.

Remember that PE may at times prove to be a good valuation metrics for the purpose of stock level valuation assessment. But, when we talk about “aggregate market valuations”, PBV gives a far less volatile indication of overall valuation scenario.

Volatility comparison of P/BV and P/E over the selected period

1. P/BV

2. PE

Sensex Trailing PE Nifty Trailing PE

From the graph we can conclude that PBV ratio is less volatile and stable figure which does not get impacted by the noise around the Market as compared to PE ratio and hence acts as a better indicator for making investment decisions.

Employment Provident Fund Organisation (EPFO)-investment into equity markets through an exchange traded fund (ETF). The fund will be managed by SBI AMC. In the initial stages, the EPFO will invest about Rs.410 crore or 5% of its incremental deposits each month during fiscal 2016.

EPFO’s entry will bring quality long-term money into Indian equities. More importantly, it will bring better balance to equity markets at the time of foreign fund outflows.

A ‘tsunami’ coming into financial markets from domestic investors, anticipating about Rs.2 lakh crore of money over a long-term period. “The DII flows will consolidate further in the coming months as pensions funds arrive in equity markets. The pension funds have not invested even a single rupee into equities, and now they have been allowed to invest anywhere between 5% to 15%. Globally, pension funds are the biggest owners of equity markets. It will benefit both the markets and the pensioners VIEW BY Nilesh Shah, MD, Kotak AMC.

The entry of EPFO as a great opportunity for the markets as it would get access to funds of close to Rs.1 lakh crore per year based on 10-15% investment of its corpus. It is potentially a great opportunity… Although initially the money would come through the ETF route stated by HDFC AMC

The equity ETFs market in India is at a Initial stage with total assets of other ETFs at Rs.7,322 crore as on June 2015.

The EPFO has received an average monthly incremental deposits of Rs.8,200 crore during this financial year so far. By the end of twelve months of investing, EPFO will invest close to Rs.5,000 crore in equity ETFs out of its total annual investible fund of Rs.6.5 lakh crore.

Prime Database recently carried out an exercise to identify the 10 largest FPIs in India.Through an examination of 1,447 listed Indian companies disclosure of the names of their foreign investors to stock exchange — and it turned out these FPIs together held Rs 1.79 lakh crore in Indian equities.

FPIs hold a major chunk of the non-promoter stake in Indian companies.

Europacific Growth Fund is the biggest FPI in terms of disclosed shareholding (above one per cent). Europacific Growth Fund belongs to the US-based Capital Research and Management Company. For Europacific, India is the biggest emerging market destination and fourth-largest overall — after Japan, the UK and France. As much as 87.5 per cent of its investments are outside the US.

The fund managers’ commentary in Europacific’s annual report released in March this year might explain why they allocated more money to India than China. It noted India and China shared similar growth trends, including the rise of the middle-class. However, India’s demographics were better than China’s. The median age in India was 27, noted the report, while United Nations data showed the median age in China was around a decade higher.

Financial stocks are also high on the list of India’s second-largest FPI, the $38-billion Oppenheimer Developing Markets Fund. Led by Justin Leverenz, who has been overseeing the asset management since 2007, the fund invests 14.8 per cent of its total assets in India, second only to China, which received 19.4 per cent of its total investments as of June 2015.

HDFC Bank, ICICI Bank, and HDFC are among the popular investment names in these funds.

“Amongst sectors, the maximum exposure as on 30th June, 2015 was in Banks (Rs. 3.44 lakh crore) followed by IT Software (Rs.2.59 lakh crore). The sector which has seen the maximum increase in FII holdings in the last one year was also the Banking sector (from Rs.2.83 lakh crore to Rs.3.44 lakh crore),” .